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Modelling Effective Office Rents by Matt Hall DTZ, 125 Old Broad Street, London, EC2N 2BQ Tel: +44 (0)20 3296 3011 Email: [email protected] & Tony McGough DTZ, 125 Old Broad Street, London, EC2N 2BQ Tel: +44 (0)20 3296 2314 Email: [email protected]. Introduction. Introduction - PowerPoint PPT Presentation
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Page 1
Modelling Effective Office Rents
by
Matt HallDTZ, 125 Old Broad Street, London, EC2N 2BQ
Tel: +44 (0)20 3296 3011 Email: [email protected]
& Tony McGough
DTZ, 125 Old Broad Street, London, EC2N 2BQTel: +44 (0)20 3296 2314 Email: [email protected]
Page 2
Introduction
• Introduction
• Data calculation
• Models
• Results
Page 3
Introduction
• Prime office rents are often questioned for lack of responsiveness to market pressures
Issue
Page 4
Introduction
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00£ psf
Leeds London - City
Source: DTZ Research
Prime office rents
Page 5
Introduction
• Prime office rents are often questioned for lack of responsiveness to market pressures
Some reasons
• Smaller markets struggle to get evidence of declines• Less active market especially in quiet times• But see some example of this even in London
• Asymmetric Properties of rental movement (Hendershott et al)2008
• Definitely something there but a quantifiable known is effective rents
Issue
Page 6
Introduction
• Incentives are used to hold up rents in downturns
• It is in landlord’s interests to maintain headline rents• Supports capital value and provides a market floor• Provides a lock in value for developers• Market evidence used in rent reviews• Especially with upward only rent reviews
• Impact and how to treat incentives for investment returns well documented (Brown) 1995
Effective rents
Page 7
Introduction
Prime and effective office rents in London City
1990
1990
1991
1992
1993
1993
1994
1995
1996
1996
1997
1998
1999
1999
2000
2001
2002
2002
2003
2004
2005
2005
2006
2007
2008
2008
2009
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00£psf
Source: DTZ Research
Page 8
Data Collection
• Need to standardise approachTake account of standards– UK 3 month always free for fit out– Other markets in ‘turn key’ condition– No rent frees beyond first break (5 years in UK 3 years in Italy)
• Standardise lease lengths at 10 years– No rent frees beyond first break (5 years in UK 3
• Calculate effective rent(((Lease length – (rent free period-fit out allowance))/lease
length)*prime rent
Page 9
Models
• From this we calculate an implicit rent series of rent free months and model this
• Other variables used
• Availability• Stock• Main driver of prime rent – not the rent itself• Lagged incentive
Page 10
Models
Source :DTZ Research
Coefficient Std. Error t-Statistic Prob.
C 0.883235 0.385658 2.290203 0.045DLOG(UKLOOGVAJKL) -4.725 2.098057 -2.252081 0.048UKLOCOAV/UKLOCOST 8.169706 2.197412 3.717877 0.004LOG(UKLOCORF(-1)) 0.487866 0.136537 3.573143 0.0051
R-squared 0.857329 Mean dependent var 2.6595Adjusted R-squared 0.814528 S.D. dependent var 0.576503S.E. of regression 0.248279 Akaike info criterion 0.286433Sum squared resid 0.616427 Schwarz criterion 0.46902Log likelihood 1.994971 Hannan-Quinn criter. 0.269531F-statistic 20.03045 Durbin-Watson stat 2.160189Prob(F-statistic) 0.00015
London City
Page 11Source :DTZ Research
Results
Paris IDF Office markets
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130.00
100.00
200.00
300.00
400.00
500.00
600.00
700.00
800.00
900.00
Prime Rent Effective Rent
€psm
Page 12Source :DTZ Research
Results
Brussels Office markets1
99
5
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
100.00
120.00
140.00
160.00
180.00
200.00
220.00
240.00
260.00
280.00
300.00
Prime Rent Effective Rent
€ per sq m
Page 13
Conclusions
• Rents are similarly volatile at effective rents level• Some markets (UK) have used incentives a long time but
other markets (Belgium) are using them more – particularly in difficult conditions
• Some markets (Madrid) do not use incentives and thus appear more volatile
Page 14Source :DTZ Research
Conclusions
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
400.00
450.00
500.00
Prime Rent Effective Rent
€ per sq m
Madrid Office markets
Page 15Source :DTZ Research
Conclusions
Manchester Office markets
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
Prime Rent
£psf
Page 16Source :DTZ Research
Conclusions
Manchester Office markets
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
Prime Rent Effective Rent
£psf
Page 17
Conclusions
• Rents are similarly volatile at effective rents level• Some markets (UK) have used incentives a long time but
other markets (Belgium) are using them more – particularly in difficult conditions
• Some markets (Madrid) do not use incentives and thus appear more volatile
• Incentives are being increasingly used and this trend will continue
